The Obama Administration & China: What Does the Future Hold?

Dear clients and friends,

As the world anticipates President-elect Barack Obama’s first few weeks in office, the U.S.-China relationship is a key issue on many peoples’ minds. Arguably the world’s most significant trading alliance, bilateral trade between the two countries exceeded US$380 billion in 2007.i The United States and China accounted for more than one-third of the global gross domestic product that year.ii

Now, the dynamics are changing. For the first time in more than a decade, net trade between China and the U.S. is expected to decline in 2009 against the backdrop of the global financial crisis. In addition, when President-elect Obama is sworn in on January 20th, China will be the largest owner of U.S. public and private debt to the tune of US$2 trillion. We are entering a new era of bilateral relations that will be shaped by unprecedented challenges, some of which we are only just beginning to understand.

In the midst of all the noise, there are a number of signals becoming clear that could have implications for your business in the years to come. These fall into four categories. We have also provided analysis of key Obama administration officials.

Financial Turmoil – Challenge or Opportunity? With both economies cooling and looking for new growth engines, China and the US are reevaluating their exposure to foreign markets. The deteriorating economic conditions will bring issues such as the trade deficit and currency manipulation back into the spotlight during the next strategic economic dialogue (SED). U.S. companies are beginning to allocate additional resources to their China operations, still a vibrant growth market, and at the same time Chinese companies are beginning to explore unbelievable bargains and expansion opportunities in the U.S. market.

Protectionism – What to Expect and How to Break Through: Conventional wisdom is that Republican presidents are economically favorable for China, as free trade is their mantra. Many are expecting that Obama, as a Democrat, will pursue a more protectionist economic agenda. Watch carefully how the Obama administration handles inbound Chinese businesses and how China handles disputes surrounding intellectual property, joint venture agreements, and the country’s new antimonopoly law.

Public Diplomacy – The Image of the United States under President Obama: Obama’s election has significant symbolic value in China. Political experts believe this could lead to greater appreciation of U.S. culture and values, and in turn will increase American “soft power” in China. This may benefit U.S. businesses at first only on the margins, but in the long haul could bolster the overall trade environment between the two countries.

The Changing Geopolitical Environment: President-elect Obama will solicit China’s support on issues relating to North Korea, Pakistan, Zimbabwe, and Darfur, among others. He may be able to get it, but China will be looking for more breathing room on Tibet, Xinjiang, and Taiwan. Fortunately for Obama, relations between Beijing and Taipei are warmer than ever. The same cannot be said about Tibet, which will remain a sticky subject. As always, choosing to pressure China here could have major repercussions. Obama’s approach to these issues will be a clear test of his touted pragmatism.

Key China Policy Players in the Obama Administration: Secretary of State Hillary Clinton, Treasury Secretary Timothy Geithner, and U.S. Trade Representative Ron Kirk will all play prominent roles in shaping the new administration’s approach to U.S.-China relations.